The EC Rules on Fiscal State Aid -an imperfect instrument in the work against harmful tax competition

Abstract: The EC provisions on fiscal State aid have since 1997 become an important part of the work against harmful tax competition. The application of the State aid rules to harmful measures is a reversal of the common direction of aid (i.e. leading to preferential tax treatment). This creates several interest-ing legal problems, for example if these rules provide a suitable method to tackle harmful tax competition and if such application is in line with the purpose of these rules. Another legal problem is the relation between the Code of Conduct, that is a soft law instrument, and the legally binding State aid rules. The thesis does not only focus on these questions but it also tries to analyse the problems on a deeper level. A question that then arises is if it is necessary to work against harmful tax competition at all. Finally, the practical side of the usage of the State aid rules is analysed, have the appli-cation been successful at all? The first chapters are of a more descriptive character. These show that there are different opinions on how extensive the impact of EC law shall be in the area of direct taxation. Some economists mean that there is no need to limit tax competition since it will adjust the tax burden to the market with less negative effects than one created on a market without free and fair competi-tion. On the other hand, the institutions and several Member States are con-vinced that there are parts of tax competition that need to be fought. The field of direct taxation is characterised by enormous problems in adopting legally binding reforms. The Member States fiscal sovereignty is an important reason for these problems together with a weak legal base for such reforms in the Treaty. These past problems are dealt with in order to provide a wider understanding for the later switch to other legal solutions such as soft law. Another of these solutions, when the work against harmful tax competition was started, was the use of negative integration via the State aid rules. The application of these rules in order to tackle harmful tax com-petition was part of the more systematic approach often labelled ''the tax package''. Following these chapters, an examination of the EC Treaty rules on State aid is made before I turn to the further analysis of the State aid rules as an instrument to work against harmful tax competition. Via a Commission notice from 1998 and the Code of Conduct the applica-tion of the State aid rules was changed, or more correct broadened. An obvi-ous link between harmful tax competition and the set of rules in Article 87-89 was also created. The State aid provisions provide an attractive method to use since they are, if no problem because of the selectivity criterion arises, of legally binding nature. However, the rules were not designed or intended to restrict harmful tax competition. Another problem with the application is that, mainly because of the selectivity criterion, not all measures will be covered by the State aid rules. The only instruments that can catch these measures are the Code of Conduct and the Treaty rules on coordination. In practice, the latter is not a probable solution and the first is limited in scope because of its soft law character. The arguments in favour of applying the State aid rules to tackle harmful tax competition have not completely convinced me, this is above all the case if the selectivity criterion is broadened beyond the wording of the Treaty. Even if the State aid rules might be used as a complementary instrument in the work against harmful tax competition they can clearly not be the main method to accomplish reforms of community taxation. Therefore I believe that to use the EC State aid rules to tackle harmful tax competition is not the preferred solution. It can be questioned if the application is in line with the purpose of these rules and they cannot, in my opinion, be used as substitute to reforms adopted via legally binding acts. The final part of the last chapter deals with the factual usage of the State aid rules. It also includes a comparison of the measures identified as harmful under the Code of Conduct and the State aid provisions. The Conclusion that is drawn from these chapters can be summarised as with today's system there is need to have both a Code of Conduct and to make use of the State aid rules if harmful tax competition should be limited successfully.